After three challenging quarters leading up to Cognex's (NASDAQ:CGNX) fourth-quarter financial report, shareholder expectations were extremely low. The machine-vision leader has banged the drum all year about the challenging conditions facing the industrial markets that it serves. China was particularly vulnerable, after a lengthy trade war and general economic weakness, and matters have only gotten worse with the outbreak of the novel coronavirus that has paralyzed much of that country.

Cognex delivered results that exceeded its forecast but said they "reflect the serious challenges we faced in 2019 due to the deterioration of business conditions," particularly in China and Europe.

A robotic arm using machine vision on a cell phone assembly line.

A robotic arm using machine vision on a cellphone assembly line. Image source: Getty Images.

Customer spending falls (again)

Cognex reported revenue of $169.77 million, down 12% year over year. While it said the results were "frustrating," they easily exceeded analysts' consensus estimates of $161.13 million, as well as topping the high end of management's forecast range of $155 million to $165 million. 

Gross margin was 74%, also falling within the mid-70% range that management had forecast. Operating income felt the sting of the revenue shortfall, declining 59% year over year to $17.61 million. A discrete tax benefit helped shore up the bottom line, adding $61 million, or $0.35 per share. This resulted in net income of $80.33 million and diluted earnings per share of $0.46, nearly doubling from $0.24 in the prior-year quarter. Excluding the one-time item, however, things were much worse, with EPS of $0.11 falling both year over year and sequentially, and below the $0.14 expected by analysts.

The company acquired SUALAB in Q4, which helped deepen Cognex's foray into artificial-intelligence based machine-vision technology, but also weighed on expenses. Research, development & engineering costs increased 15% year over year, while selling, general, and administrative expenses climbed 12%, primarily a result of the increased head count from the acquisition.

Cognex also declared its quarterly cash dividend of $0.055, payable on March 13 to shareholders of record as of Feb. 28.

On the conference call, CEO Robert Willett pointed to "a simultaneous reduction in spending by customers in our two largest markets, consumer electronics and automotive." He noted last quarter that this is the first time both segments have contracted simultaneously, which combined "represent about half of our revenue." Many customers in the consumer electronics market "reduced and deferred investments in large automation projects," Willett said, particularly related to smartphone manufacturing, while automotive customers scaled back spending by 10%.

Robotic arms assembling cars in a factory

An automotive assembly line using machine vision. Getty Images.

No relief in sight

For the upcoming first quarter, Cognex management is guiding for revenue in a range of $155 million to $170 million, which would represent a decline of between 2% and 10% year over year. The company said this is "primarily due to continued weakness in automotive and the estimated impact of the coronavirus outbreak." Willett also said that Cognex's first-quarter guidance estimated an impact of $10 million related to the novel coronavirus outbreak, which also caused management to widen its forecast range. Some customers that had implementation plans in Q1 are handcuffed by the evolving situation in China, adding uncertainty on the economic impact.

Cognex is also anticipating gross margins in the mid-70% range and operating expenses to be flat on a sequential basis (Q4 expenses came in at $107.3 million) and up about 10%, partly a result of the acquisition of SUALAB and its annual incentive compensation.

While the coronavirus outbreak has effectively delayed the company's recovery, there's little doubt that the market for its machine vision technology will continue to expand. Given Cognex's long-term potential, investors should sit tight, as the health crisis in China, while serious, will eventually pass.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.